Merger and Acquisition
Merger and acquisition of companies is a business strategy to bring together two existing individual companies simply to cater to higher supply, expansion of operations, substantial profitability results and more valuable production. Merger and acquisition is a consolidation dealing with selling, buying and the coming together of two existing firms. The two terms, merger and acquisition are used most often as synonyms, but are however different in their policy making. Both the moves are considered to be financial tools where merging is done with mutual consent and acquisitions happen in a more hostile manner.
Two companies come together or ‘merge’ to form an independent and a larger company. The lesser known and lesser profitable of the two companies will let go of its identity and will thus acquire or become a part of the more valued company, which retains its identity. Here the company with lesser significance gives up its stock and is given security with its stock holders by the other company. In the true sense a real merger is a rare occurrence, as a collaboration of two companies will have the presence of acquisition. The existence or claim of both companies being equal in strength is irrelevant. The union is done in the interest of both companies, where even a purchase deal with mutual consent of both CEOs is considered a merger.
Classifications of Merger
Mergers are classified based on the nature and relationship of both companies
- Two companies which share and deal with a similar product and are in direct competition with each other have a Horizontal Merger among them
- The Vertical merger is the collaboration between a company and a supplier or a company and the customer. For e.g., merger of a textile producing company and a boutique
- Product extension Merger and Market extension merger. The latter is a merging of two companies that deal with the same product but in different market areas and the former is a merging of two companies producing not the same but similar kind of products
- Conglomeration is a union of companies with no business areas of similarity
Mergers are also classified based on the nature of finances made.
- Purchase Merger is when one company purchases another
- Consolidation Merger occurs when an independent new company is formed and purchases the other two companies under the new name
Acquisition is more of a hostile manner of merging and is thus also referred to as a buyout or a takeover of a company by another. In this acquiring of a company, the target firm is unaware of or more often does not have prior awareness of the offer. However there are friendly acquisitions of companies where both parties have cooperative negotiations and a mutual agreement of the deal. These kinds of acquisitions are a more common occurrence. Here unlike in mergers there is an absence of exchange of stocks and formation of any new company.
Credibility of Merger and Acquisitions
The advantages and worthiness of these actions between two companies is always a gamble but if the deal is managed and played well, it results in positive outcomes. The investors need to find targets for mergers that will be a success and this is done through a sequence of moves starting from approaching a target to negotiating terms and managing the project till the end. Mergers and Acquisitions do have the tendency to be unsuccessful or entirely fail for reasons of a lack of foresight or negligence on the part of the management on the day to day operations. They can also fail due to a loss in revenues or due to the inability to face and overcome challenges.
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